Reinhart Says Fed Buys More Debt, Timing Uncertain: Tom Keene

Sept. 21 (Bloomberg) -- The Federal Reserve will resume its
bond purchases at some point in a strategy known as quantitative
easing to bolster the economy because it wants to maintain
credibility, said Vincent Reinhart, a former monetary affairs
director at the U.S. central bank.

“If the unemployment rate does stay up in the neighborhood
of 9.5 percent, ultimately Fed officials are going to say
they’ve got a reputational risk, that if they’re not seen as
acting in a time of severe macro distress their reputation will
be impaired,” Reinhart said in a radio interview today on
“Bloomberg Surveillance” with Tom Keene. “Ultimately, QE2
will leave the dock.”

The U.S. unemployment rate climbed to 9.6 percent in August
from 9.5 percent in July and is forecast to average more than 9
percent through next year.

The central bank is unlikely to announce an expansion of
bond purchases today, as policy makers continue to have concern
about whether it’s the right decision, said Reinhart, a resident
scholar at The American Enterprise Institute in Washington.

Economic data remained weak during the first four weeks
after the Fed’s Aug. 10 decision to use the maturing proceeds
from its portfolio to buy Treasuries, though it has improved
enough during the past two weeks to sow doubt about the need for
more buying, Reinhart said.

“It’s a committee that is split,” Reinhart said.

Required Reading

Investors should look to the Fed’s statement that will be
released at about 2:15 p.m. to determine what direction the
central bank will take, Reinhart said. If policy makers discuss
using the central bank’s balance sheet as a means to achieve
policy goals, that would suggest more debt purchases, he said.

The Fed said in November 2008 that it would buy $500
billion of mortgage securities and $100 billion of agency
debentures. In March 2009 the bank increased those targets to
$1.25 trillion mortgages and $200 billion in agency debt while
also committing to buy $300 billion of Treasuries.

Monetary policy has taken on increasing importance because
other areas where policy makers might advance ideas to improve
the economy are consumed in political struggles and the run-up
to Congressional elections in November, Reinhart said.

“They have limited scope to do more,” said Reinhart, who
worked at the Fed from 1983 until 2007. “The fact that we’re
focusing so much on monetary policy shows how poorly we’re doing
with everything else.”